Two Appellate Courts Reach Opposite Conclusions Regarding Application of SLUSA to Nearly Identical Complaints

Skadden, Arps, Slate, Meagher & Flom LLP

O’Donnell v. AXA Equitable Life Ins. Co., No. 17-1085-cv (2d. Cir. Apr. 10, 2018); Shuster v. AXA Equitable Life Ins. Co., No. A-3160-15T1 (N.J. Super. Ct. App. Div. Apr. 17, 2018)

The Second Circuit and the New Jersey Appellate Division of the Superior Court reached opposite conclusions in two putative class actions against the same defendant, each involving the application of SLUSA, which precludes class actions based on state law claims that allege misrepresentations or omissions in connection with the purchase or sale of covered securities.

Two plaintiffs brought claims against a life insurance company on behalf of a nationwide putative class of policyholders — one in Connecticut state court and one in New Jersey state court — alleging that the insurer implemented an investment strategy in variable insurance contracts, in alleged breach of those contracts. Both complaints were based on a regulatory consent order entered into by the insurer and its regulator, the New York State Department of Financial Services (DFS), in which DFS found that the insurer made omissions in filings with DFS concerning the implementation of the investment strategy. Each plaintiff alleged that the insurer’s filings with DFS violated a New York insurance law and breached a provision in the insurance contract requiring compliance with those laws. Each plaintiff claimed to have been harmed on the grounds that their investment returns would have been higher without the implementation of the investment strategy.

The insurer removed both actions to federal court under SLUSA. (The Connecticut action was thereafter transferred to the Southern District of New York.) In the action that originated in Connecticut, the court determined that SLUSA precluded that plaintiff’s putative class action. The court reasoned that the plaintiff’s breach-of-contract claim depended entirely on an allegation that the insurer had made omissions to him and to DFS about the new investment strategy and that his decision to hold his investment after the new strategy was introduced was made “in connection with” those alleged omissions. In the New Jersey action, the federal court remanded the case to New Jersey state court, finding that SLUSA did not preclude the action because the consent order did not address that plaintiff’s policy. On remand, however, that plaintiff conceded that her claim depended on the consent order. The New Jersey state court thus performed its own analysis of SLUSA and determined that SLUSA precluded that plaintiff’s putative class action. Both cases were appealed.

The Second Circuit reversed the dismissal of the Connecticut action, holding that SLUSA did not preclude the action because the insurer’s alleged misrepresentations or omissions were made to DFS and not to the plaintiff, and there could be “no link between the misrepresentation (to a regulator) and the inaction of a securities holder following misrepresentations of which the holder was unaware.” The Second Circuit further held that the “in connection with” requirement was not met because the insurer’s alleged misrepresentation “could not have been ‘material to a decision by one or more individuals ... to buy or sell a covered security’ for the simple reason that it was unknown to them.” The Second Circuit directed that the action be remanded to Connecticut state court.

One week after the Second Circuit rendered its decision, the New Jersey Appellate Division reached precisely the opposite conclusion and affirmed the dismissal of the New Jersey action. The New Jersey Appellate Division rejected the plaintiff’s contention that her claims did not satisfy SLUSA’s “in connection with” requirement on the theory that the insurer’s nonpublic filings with DFS did not induce her to make any investment decision. It reasoned that the U.S. Supreme Court in Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71 (2006), rejected such a “cramped construction.” The New Jersey Appellate Division concluded that the “in connection with” requirement was met because the plaintiff was alleged to have held the investments in which the new strategy was implemented as a consequence of the insurer’s alleged omissions to DFS.

The plaintiff moved the New Jersey Appellate Division to reconsider its decision based on the Second Circuit’s holding in the Connecticut action, but the Appellate Division denied the motion, explaining that it had considered the Second Circuit’s decision and did not find its reasoning persuasive.

This summary can be found in the September 2018 issue of Inside the Courts.